Youthink! The World Bank's blog for youth
Syndicate content

Is credit just another form of cancer?

Yasmine Cathell's picture

Host brotherI was sitting at the dinner table in Cochabamba Bolivia, when my host brother asked: “How is it possible that Americans all have a car, a house and a big TV?” I think he was hoping I would let him in on some big secret but instead I explained that most Americans don’t actually own their car or house. They lease and take out loans to make these big purchases and then slave away at their jobs so that they can make their monthly payments.

My brother wasn’t too stoked with the response, but accepted it, and we went on to talk about how credit was at the source of the current economic crisis in America. 

Not more than 2 minutes later my host mom asked about my internship in Bolivia, which was with a microfinance institution. …Imagine having to then explain that I was coming into their country to help disperse more loans only this time to poor women!!!

I really had to ask myself if there wasn’t a greater potential for credit to hurt rather than help.

Well in order to better fall asleep that night I told myself that the MFI (Microfinance Institution) I was working with did NOT give out loans for personal or material purchases. The loan recipients are only given mini-loans to begin or improve their current business, thereby using a onetime loan to create a sustainable income for their family.  This particular MFI also provides their borrowers with mandatory business training, basic health training and health insurance for them and their families.

But the MFI I worked with faces a number of competitor micro-lending institutions and banks that are also targeting the poor, while not necessarily providing them with these additional services.

…I can’t help but think that world’s poor are particularly susceptible to the infectious aspect of credit, this being the appeal of seemingly low interest rates and quick access to money. While those of us reading about micro-credit might understand the need for high interest rates of 30%-40% (to cover the risks involved with lending to the poor), the actual recipients of such loans were routinely told that their interest rate was 2%.  What they were not told is that the 2% interest is calculated based on their initial loan amount and so regardless if they have already paid back most of the loan their interest payment does not adjust to 2% of the remainder, but rather remains the original fixed 2% of their initial loan, resulting in an effective interest of closer to 30% or 40%.

Granted before making any kind of financial commitment it is advisable to read the small print, but when dealing with the world’s poor we must keep in mind that many cannot read at all.  So, who then is responsible for ensuring that these individuals are fully aware of what they are getting themselves into?  

Comments

Submitted by Zeeshan on
Yasmine, great blog post! I struggle with these competing interests all the time. Is microcredit really better than a regular loan? Is there a substantive enough difference that makes one more preferable over the other? I think your post helps shed light on some of the "behind-the-scene" issues we must deal with. Thanks for raising awareness on this!

Add new comment